Tags: Euro Zone | Collapse | Economic Weakness

Euro Zone Set to Collapse Amid Economic Weakness

By Dan Weil   |   Tuesday, 05 Jan 2010 08:56 AM

The economic weakness of many members of the 16-nation euro zone has raised fears that the monetary union could crumble.

Portugal, Ireland, Italy, Greece and Spain, the so-called “Piigs,” especially suffer from sluggish economies and burgeoning debt burdens.

Credit rating agencies recently downgraded Greece and put Spain on credit watch.

The rubber will meet the road for the euro zone when economic recovery in Northern Europe, particularly Germany and France, requires the European Central Bank (ECB) to raises interest rates.

The question is whether the Piggs can weather a rate hike, given that their economies are likely to remain sluggish.

“If inflation picks up in France and Germany, the smaller economies will be left behind in stagnation and deflation,” Jordi Gali, head of the Barcelona Center for Research in International Economics, told The New York Times.

“Such an asymmetric recovery is pretty likely. And if the ECB raises rates, it could get very ugly.”

Gali says that the euro remains resilient.

But many experts fear that governments in the weak economies might be reluctant to take the unpleasant steps necessary to restore fiscal prudence.

And the weak countries can’t count on a bailout from the ECB.

"The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances," Ewald Nowotny, a member of the ECB's Governing Council, told The Wall Street Journal.

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The economic weakness of many members of the 16-nation euro zone has raised fears that the monetary union could crumble. Portugal, Ireland, Italy, Greece and Spain, the so-called Piigs, especially suffer from sluggish economies and burgeoning debt burdens. Credit...
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2010-56-05
 

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